Foundaions of economics 6th by robin bade ch09

© 2013 Pearson Who wins and who loses from globalization? © 2013 Pearson Global Markets in Action CHAPTER CHECKLIST When you have completed your study of this chapter, you will be able to Explain how markets work with international trade Identify the gains from international trade and its winners and losers Explain the effects of international trade barriers Explain and evaluate arguments used to justify restricting international trade © 2013 Pearson 9.1 HOW GLOBAL MARKETS WORK Imports are the good and services that we buy from people in other countries Exports are the goods and services we sell to people in other countries © 2013 Pearson 9.1 HOW GLOBAL MARKETS WORK  International Trade Today The United States is the world’s biggest international trader and accounts for 10 percent of world exports and 15 percent of world imports In 2009, total U.S exports were $1.5 trillion, which is about 11 percent of the value of U.S production In 2009, total U.S imports were $1.9 trillion, which is about 13 percent of the value of total U.S expenditure © 2013 Pearson 9.1 HOW GLOBAL MARKETS WORK The United States trades internationally in goods and services In 2009, U.S exports of services were $0.5 trillion (33 percent of total exports) and U.S imports of services were $0.4 trillion (21 percent of total imports) The largest U.S exports of goods are airplanes The largest U.S imports of goods are crude oil and automobiles The largest U.S exports of services are banking, insurance, business consulting, and other private services © 2013 Pearson 9.1 HOW GLOBAL MARKETS WORK  What Drives International Trade? The fundamental force that generates trade between nations is comparative advantage The basis for comparative trade is divergent opportunity costs between countries National comparative advantage is the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation © 2013 Pearson 9.1 HOW GLOBAL MARKETS WORK The opportunity cost of producing a T-shirt is lower in China than in the United States, so China has a comparative advantage in producing T-shirts The opportunity cost of producing an airplane is lower in the United States than in China, so the United States has a comparative advantage in producing airplanes Both countries can reap gains from trade by specializing in the production of the good at which they have a comparative advantage and then trading Both countries are better off © 2013 Pearson 9.1 HOW GLOBAL MARKETS WORK  Why the United States Imports T-Shirts Figure 9.1(a) shows that with no international trade, U.S demand and U.S supply determine The U.S price at $8 a T-shirt and U.S firms produce at 40 million T-shirts a year and U.S consumers buy 40 million T-shirts a year © 2013 Pearson 9.1 HOW GLOBAL MARKETS WORK The demand for and supply of T-shirts in the world determine the world price at $5 The world price is less than $8, so the rest of the world has a comparative advantage in producing T-shirts Figure 9.1(b) shows that with international trade, The price in the United States falls to $5 a T-shirt © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION The Dumping Argument Dumping occurs when a foreign firm sells its exports at a lower price than its cost of production Two reasons why a firm might engage in dumping are • Predatory pricing—when a firm sells below cost in the hope of driving out competitors • Subsidy—a firm receiving a subsidy can sell profitable at price below cost © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION This argument does not justify protection because It is virtually impossible to determine a firm’s costs; If there was a natural global monopoly, it would be more efficient to regulate it than to impose a tariff against it If the market is truly a global monopoly, better to regulate it rather than restrict trade © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Four Newer Arguments for Protection Other common arguments for protection are that it • Saves jobs • Allows us to compete with cheap foreign labor • Brings diversity and stability Penalizes lax environmental standards â 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Saves Jobs The idea that buying foreign goods costs domestic jobs is wrong Free trade destroys some jobs and creates other better jobs Free trade also increases foreign incomes and enables foreigners to buy more domestic production Protection to save particular jobs is very costly © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Allows Us to Compete with Cheap Foreign Labor The idea that a high-wage country cannot compete with a low-wage country is wrong Low-wage labor is less productive than high-wage labor And wages and productivity tell us nothing about the source of gains from trade, which is comparative advantage © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Brings Diversity and Stability A diversified investment portfolio is less risky than one that has all of its eggs in one basket The same is true for an economy’s production A diversified economy fluctuates less than an economy that produces only one or two goods But big, rich, diversified economies like those of the United States, Japan, and Europe not have this type of stability problem © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Penalizes Lax Environmental Standards The idea that protection is good for the environment is wrong Free trade increases incomes and poor countries have lower environmental standards than rich countries These countries cannot afford to spend as much on the environment as a rich country can and sometimes they have a comparative advantage at doing “dirty” work, which helps the global environment achieve higher environmental standards © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION  Why Is International Trade Restricted? The key reason why international trade restrictions are popular in the United States and most other developed countries is an activity called rent seeking Rent seeking is lobbying and other political activity that seeks to capture the gains from trade You’ve seen that free trade benefits consumers but shrinks the producer surplus of firms that compete in markets with imports © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Those who gain from free trade are the millions of consumers of low-cost imports But the benefit per individual consumer is small Those who lose are the producers of import-competing items Compared to the millions of consumers, there are only a few thousand producers © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Because the gain from a tariff is large, producers have a strong incentive to incur the expense of lobbying for a tariff and against free trade Because each consumer’s loss is small, consumers have little incentive to organize and incur the expense of lobbying for free trade The gain from free trade for any one person is too small for that person to spend much time or money on a political organization to lobby for free trade © 2013 Pearson 9.4 THE CASE AGAINST PROTECTION Each group weighs benefits against costs and chooses the best action for themselves But the group against free trade will undertake more political lobbying than will the group for free trade © 2013 Pearson Who Wins and Who Loses from Globalization Economists generally agree that the gains from globalization vastly outweigh the losses But there are both winners and losers The U.S consumer is a big winner Globalization has brought iPods, Wii games, Nike shoes, and a wide range of other products to our shops at ever lower prices © 2013 Pearson Who Wins and Who Loses from Globalization The Indian (and Chinese and other Asian) worker is another big winner Globalization has brought a wider range of more interesting jobs and higher wages © 2013 Pearson Who Wins and Who Loses from Globalization The U.S (and European) textile workers and furniture makers are big losers Their jobs have disappeared and many of them have struggled to find new jobs even when they’ve been willing to take a pay cut © 2013 Pearson Who Wins and Who Loses from Globalization But one of the biggest losers is the African farmer Blocked from global food markets by trade restrictions and subsidies in the United States and Europe, globalization is leaving much of Africa on the sidelines © 2013 Pearson ... (33 percent of total exports) and U.S imports of services were $0.4 trillion (21 percent of total imports) The largest U.S exports of goods are airplanes The largest U.S imports of goods are... and accounts for 10 percent of world exports and 15 percent of world imports In 2009, total U.S exports were $1.5 trillion, which is about 11 percent of the value of U.S production In 2009, total... International trade lowers the price of an imported good and raises the price of an exported good Buyers of imported goods benefit from lower prices and sellers of exported goods benefit from higher